ECB will start raising interest rates for the first time since 2011
The European Central Bank holds its monetary policy meeting today and is likely going to raise interest rates, the action that has not been seen since 2011.
The ECB was delaying rate hike for some time, despite the most of central banks increasing borrowing cost few times in past months, in attempts to curb soaring inflation.
The Eurozone inflation is more than four times above the ECB’s 2% target and approaching double-digit value that raises risk of getting entrenched and prompting the central bank to start tightening its monetary policy.
The ECB policymakers are forced to hike interest rates and try to put high inflation under control, even though being aware that increasing borrowing cost in the situation when the economy was strongly impacted by the war in Ukraine, may significantly slow economic activities and cause more serious consequences.
Markets widely expect a 25 basis points hike today, the action that was already signaled by the ECB, but worsening economic situation and fears that the central bank may lose control of soaring inflation, brought to the table another option for more aggressive approach and 50 basis points hike in July meeting.
The ECB policymakers remain united in their action, but also face another obstacle in falling Euro, which hit the parity level against the US dollar for the first time in 20 years, adding to inflationary pressure and signaling that higher percentage of rate increase would be more appropriate at this moment.
The decision to raise interest rates by 0.5% would also help more indebted EU economies by preventing soaring borrowing cost in these countries.
The central bank will announce and elaborate its decision on the press conference after the meeting, but is also expected to signal their next steps, although likely without a firm commitment.
The economists expect the ECB to continue policy tightening by a 50 basis points hike in September and possibly 50 basis points in October, expecting to have a total increases by 170 basis points by the end of the year.